Gifting Phase

What it is:

A gifting phase is when a person begins planning for or actively begins giving away wealth as part of his or her estate planning.

How it works (Example):

Let's say Jane Smith is 87 and has accumulated about $3 million over a lifetime of saving and investing. She estimates that she will need about $1 million to pay for her medical and living expenses for the rest of her life. The remaining $2 million is hers to give away as she chooses. She puts $1 million in a trust for her son and decides to donate $1 million worth of stock to a local animal shelter.

Many people attempt to reduce the size of their estate while they're still alive by giving away portions of their estate. This can be done without triggering death taxes as long as the gifts are below the gift-tax exemption limit. A gift tax is federal tax on anything of value that one person gives to another while the donor is still alive. Gifts to a spouse or a political organization are usually not subject to the gift tax (they may be taxable, for example, if the spouse is not a U.S. citizen). Additionally, if a person pays college tuition or medical bills directly, the gift tax also does not apply.

Why it Matters:

During the gifting phase, tax priorities change. Whereas most investors spend most of their tax-planning time working to minimize incometaxes, during the gifting phase the priority becomes minimizing estatetaxes and burdens on those who will inherit the investor's assets.

The gifting phase can be a very rewarding time for the investor because it enables him or her to give large amounts of money to important causes and make bold statements with that money.

Matters of estate tax require the advice of a good tax advisor, because the tax rules are complicated and the thresholds change. The tax liability becomes even more complicated if the receiver of a bequest sells the gift, which often happens when people donate cars, art or real estate to charities.

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